Student Loan Management for High Earners

13.10.2020 demonw

Many student loan resources are geared toward borrowers who are struggling.

Repayment for those with a steady income and a good job presents its own unique set of challenges.

Even though a high salary makes paying down student loans much easier, there are still plenty of opportunities for savings and mistakes to avoid.

Leverage Financial Strength into Better Loans

One of the many perks of being in a strong financial position is that companies will be very aggressive to get your business.

This is especially true for student loan borrowers who are employed and have a solid credit score.

As college students applying for student loans, nearly all borrowers carry a high degree of risk. Most students don’t have jobs, and they don’t have degrees. Graduation and future employment is the goal, but it is far from a certainty. Because students are inherently risky customers, lenders typically charge a relatively high interest rate on student loans.

At the point a student becomes a graduate earning a steady paycheck, the risk of default drops considerably. These low-risk borrowers are the prime targets of the student loan refinance companies.

This stronger financial position is the reason that borrowers who were lucky to get student loans in the 6-8% range while they were in college can now refinance those same loans at around 2%.

Think of Federal Protections as an Insurance Policy

Student loan refinancing isn’t always the best choice for some borrowers, even if it means keeping a loan with a higher interest rate.

To someone who sees paycheck after paycheck consumed by student loan interest, it might sound silly not to pursue the lowest possible interest rate. However, there are circumstances where sticking with your current lender is the smartest move.

Borrowers who have federal student loans should consider living with a higher monthly interest rate. This is because federal loans offer borrower protections like income-driven repayment plans and student loan forgiveness.

Those in a more secure financial position may think they don’t need these federal perks, but corporate downsizing or layoffs can make things change in a hurry.

Borrowers should look at federal protections as an insurance policy. The premium on that insurance policy is the extra money that is spent on interest each month. For some, spending a little extra on interest could be money well spent. For others, the cost of insurance might be so high that they are willing to risk it.

Those looking to refinance their federal loans have about 20 different national lenders to consider, but all of them have one major limitation: once the federal debt is refinanced into a private loan, there is no way to change it back.

Be Strategic in Repayment

Many borrowers choose to pay extra to eliminate student loans as quickly as possible. Paying extra is a great idea because it means less will be spent on interest over the life of the loan.

However, not all extra payments are created equal. A common mistake is to pay a little bit extra on all student loans. While this approach is far superior to making minimum payments, it isn’t the optimal approach. Those who want to spend as little as possible should apply all of their “extra” payments towards the highest interest loan. Spreading out the extra payments could end up costing thousands of dollars.

The key is to identify a strategy for debt elimination.

This strategy doesn’t necessarily have to eliminate all student debt as quickly as possible. Sometimes applying all of the extra payments towards the loan with the lowest balance is the best approach. For example, if a borrower wanted to qualify for a mortgage, eliminating a student loan from their credit report could make a huge difference in qualifying for the desired home loan.

Ultimately, having a positive cash-flow is a huge asset to paying down student debt, but borrowers will still want to carefully consider their options when identifying the best approach.

Balancing Retirement Goals Against Debt Elimination

Student debt may be the most pressing financial issue of the present, but affording a retirement will likely be the most pressing financial issue of the future.

A common mistake made by many borrowers is to focus on student loans at the expense of saving for retirement. Even though retirement may seem like an issue for the very distant future, the reality is that steps taken in younger years will have the biggest impact on retirement.

High earners will want to ensure that they are maximizing programs like employer matching for their 401(k). These retirement contributions might prolong life with student debt, but from an economic perspective, it will often be the most efficient allocation of financial resources.

In some cases, contributions made towards retirement can also help eliminate student debt.

Turning High Income into Freedom from Student Loans

There is no denying that a good job can make managing student loans dramatically easier.

However, being under less financial stress can lead to laziness or apathy. Just because you can afford your student loan payments doesn’t mean you have them under control.

Research your options. Learn how refinancing works. Figure out how retirement and student loans interact. Investing some time into improving your student loan situation could easily be worth thousands of dollars.

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